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The Internal Revenue Service is moving in several areas to reach the next milestone in its systems modernization efforts. The goal is to more quickly and accurately process tax returns while reducing costs and providing better customer service, IRS officials say.

With 60 percent of tax returns now filed electronically, there is momentum for the IRS to reach its goal of having 80 percent of returns filed that way, said David Williams, director of Electronic Tax Administration and Refundable Credits at the IRS, on his first day in that position. He said persuading more tax professionals to e-file could add significantly to that momentum.

“It’s the law of large numbers,” Williams said at the IRS Software Developers Conference June 11. “Each new group is harder to bring on than the last. But there is a lot of opportunity looking at the business side, their issues and barriers.”

In August 2009, the IRS plans to start moving the most popular tax forms in the 1040 family for individual filers to its online Modernized e-File (MeF) platform. Large corporate and tax-exempt organizations already use the platform.

The IRS began requiring large organizations to e-file in 2005, and it expanded the program this year to include midsize businesses, said Paul Mamo, director of development services in the IRS’ Electronic Tax Administration.

“MeF is not just for corporate e-filing,” he said. “It is IRS’ e-filing program for today. Positive user experience is very high now.” MeF will speed the handling of individuals’ returns because it will replace weekly batch processing with real-time processing. It will also allow filers to attach PDF documents to their electronic returns, and it will support some state forms, Mamo said.

He added that the agency expects to retire the Electronic Management System in 2012. It has been the 1040 platform since 1994.

The foundation of the IRS’ Business Systems Modernization effort is its Customer Account Data Engine, a relational database that will replace the agency’s Kennedy administration-era Master File. Each new CADE version is an incremental step toward that goal, officials said.

“CADE is not just about increasing the number of accounts in the new database but customer service also,” said Jeff Cooper, CADE business assurance executive in the IRS’ Submission Processing office.In its latest release this year, the IRS has added the capability for CADE to establish relationships among its accounts, which Master File cannot.

“The IRS is at the mercy of taxpayer behavior,” Cooper said, citing the example of the tax filer who mistakenly used his daughter’s Social Security number. CADE was able to recognize the mistake and fix it. Under Master File, that mistake would have taken weeks and a lengthy exchange of letters back and forth to resolve.

In the next CADE release, scheduled for August, CADE will be linked to the IRS’ newly created Account Management Services. Cooper said the integration will improve customer service because IRS representatives can post address changes in real time and acknowledge the change to taxpayers the same day. CADE updates daily, while Master File posts new information on a weekly basis.

The next release of CADE will include major security and financial upgrades to support future CADE transactions, such as posting payments, Cooper said. Officials say safeguarding data and systems is a top priority, but the IRS has limited control over the third-party entities that prepare and send tax data — tax practitioners, software developers and electronic transmitters. The IRS can’t require them to follow security mandates from the Office of Management and Budget, said Carolyn Davis, senior program analyst in the IRS’ Electronic Tax Administration.

However, the IRS teaches, trains and reminds those organizations, especially small tax-preparation businesses, of the importance of protecting the security and privacy of taxpayer data, Davis said. Companies in the tax business are classified as financial institutions and must adhere to the security and privacy laws and regulations of the Federal Trade Commission and the Gramm-Leach-Bliley Act of 1999.

“We help them to get secure when they think they are, but they’re really not,” Davis said.

The IRS recently updated security guidelines for its business partners by giving them easy-to-read checklists, and last month it published a brochure with a summary of security best practices focused on risk management, data encryption and user authentication.

Davis said she will distribute the brochures at industry conferences, and she has asked software companies to include them with their products for tax professionals.

IRS tracks more phishing scamsThe Internal Revenue Service is fighting an increasing number of phishing scams that seek to bilk people of their savings and steal their identities, said Andrew Fried, a special agent at the Treasury Inspector General for Tax Administration and lead IRS investigator on Internet scams.

Stopping such scams is difficult because the perpetrators are typically overseas and beyond U.S. jurisdiction, Fried said. For example, in April the IRS took down a scam site that was posted in San Jose, Calif., and had a location in London, but originated in Ukraine.

In a typical scam, a person receives an e-mail message stating that he or she is under investigation by the IRS. The message asks the recipient to fill out a form and send it back with a credit card or Social Security number. In some cases, the message will ask the person to click on a Web link; when he or she does, the site uploads malicious code to the victim’s computer.

Although scams are becoming more sophisticated and effective, the IRS still relies on old-fashioned investigation and telephone calls.

“I feel like a sheriff on horseback,” Fried said.

The IRS has identified some criminals, frozen their accounts and returned some money to consumers, he said.